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Understanding Economic

Diversification in the UAE

ECON n400

Economics of the UAE

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Table of Contents

UAE economy including the policy environment.......................................................................2

The concept of economic diversification...................................................................................3The role of government policy and resources in attaining economic diversification................3

Government revenues for the last decade................................................................................5

Government expenditures in the UAE for the last decade...........................................5

The non-oil sector in general.....................................................................................................6

Construction..................................................................................................................6

Trade.............................................................................................................................7

Finance..........................................................................................................................7

Manufacturing...............................................................................................................8

Services.........................................................................................................................8

Correlation analysis of the growth rate in government revenue/spending and the growth

rate of the non-oil sector...........................................................................................................9

Table One: The non-oil sector in the UAE.....................................................................9

The most important factors contributed to the on-going economic diversification in the UAE

and recommendations for enhancing the process of diversification......................................13

References................................................................................................................................14

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UAE economy including the policy environment

Over the past four decades the United Arab Emirates have used the wealth of oil to

modernize infrastructure, create employment, and improve social indicators. The

UAE have been able to accumulate official reserves, maintain relatively low external

debt, and remain important donors to poor countries.

The UAE is known as an open economy with high income per capita and sizable trade

surplus annually. It also has high dependency on oil, a young and rapidly growing

national labor force, and high dependency on expatriate labor, and a dominant

public sector with a significant fiscal surplus.

UAE GDP increased by 3.3% in 2011. According to Trade Economies, the GDP average

increase from 2000 to 2010 was 6.19%. The efforts at economic diversification have

reduced the GDP based on oil and gas to 25%.

The UAE population consists of 8.1 Million people and 60% of them are employed.

The population growth is around 10% with only 13% of UAE nationals and 87%

foreigner expatriates with this huge workforce entering UAE because of real estate

development and investments in the region. UAE growth rate increased dramatically

from 3% in 2002 to 14% in 2007 making the UAE one of the highest growing

populations in the world. The population growth rate in the last four years is still

positive but not as high as before.

According to the Tradingeconomics.com, the UAE unemployment rate averaged

14.75% from 1999 until 2004.In 2010, it's reported that the unemployment rate

reached 4.3%

By January 1, 2011, the UAE was ranked number 179 of unemployment rate of 2.4%,

according to CIA world book. According to The National newspaper article, the

unemployment rate of Emiratis reached 13% according to the federal government

sector. There is high unemployment among Emirati nationals. It has been said that

the UAE is suffering unemployment crisis like other GCC countries and it's moving

upward.

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According to a report released by the Department of Economic Development in

2008, the non-oil sector of the UAE is likely to surpass the oil sector by 2025-2030.

The input of the oil sector will decrease to 40% of the GDP and to less than 20% by

2050. With the steady growth of the non-oil sector, UAE's real GDP is expected totriple by 2025 to about $ 315 billion from $ 105 in 2008.

The concept of economic diversification

Economic diversification is a strategy designed to meet different approaches to

spread industrial commitment over big range of activities or resources so there is no

overdependence on one activity or resource to gain revenue. In other words, for the

UAE the country is trying to focus within the non-oil sector to not depend on oil

sector only for country's future.

The increased levels of public spending for modernizing the infrastructure has been a

significant factor in the diversification of GCC countries toward the non-oil sector.

In order for a country to attain the most effective diversification strategy, it should

first establish great economic institutions and that is done by having institutional

regulatory reform and workforce development initiatives.

The role of government policy and resources in attaining

economic diversification

The UAE has been reported among the emerging economies that have joined

regional trade regimes, significantly progressed on market reforms, and now provide

investors with strong economic growth opportunities owing to the attractive

investment locations.

According to United Arab Emirates Ministry of Foreign Trade, "The UAE became a

contracting party to the General Agreement on Tariffs and Trade (GATT) in 1994, and

subsequently became a member of the World Trade Organization (WTO) in April of

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1996". This makes the UAE committed to international trade and its responsibilities

under the multilateral trade policy rules.

WTO reports say that the UAE tariff is much lower than the maximum tariff that can

be charged under international trade rules. Noting that The UAE tariff is 5% and the

maximum tariff is 15%, compared to other economies similar to the UAE, the UAE

charge lower rates.

The findings of the report also show that the UAE opened an encouraging and

competitive trade environment. UAE had a 98% increase in exports and a 133% rise

in imports from 1995 to 2004 which shows that the UAE expand its economy and

consistently adapt to the changing world.

Following the years of success in promoting diversification of the UAEs economy

and creating opportunities for private investment in UAE-based businesses, there is

still considerable scope for investment growth, both through encouragement of

private national investment in the UAE, as well as owing to further attraction of

foreign direct investment.

The government improved its investment climate to generate investor's interest and

become most attractive destination in the region. Following this view, a number of

economic zones offer free-tax incentives to investors and provide a selection of

business and industry sectors which are being developed.The UAE economic diversification is primarily concentrated on such core areas as

construction, aviation, port facilities, finance, tourism, and telecommunications.

Sound domestic financial regulation maintains the unprecedented growth rate onthe local investment market since the establishment of Abu Dhabi Securities Market

and Dubai Financial and International Financial Markets.

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Government revenues for the last decade

From 2001 to 2010, the revenue of oil and gas represented the total revenues of the

country which is 80% of the revenue, growing from 51.6 billion AED in 2001 to 176.3

billion AED in 2007. In 2008, the oil and gas revenue increased dramatically to 98248.

In year 2009, there was a huge decrease in oil and gas revenue due to the lower

demand of oil and the decrease of prices because of recession. By 2010 the revenue

rose by 24% to 73445.

Government expenditures in the UAE for the last decade

On the other hand, expenditures which are: wages and salaries, subsidies and

transfers, goods and services have and average represented of 81% of total

expenditures from 2001 to 2007. Capital expenditures revealed an upward trend as

they grown from AED 13.3 billion in 2001 to AED 17.3 billion in 2007 which indicated

the continued role of UAE government in developing the infrastructure of the

country over the last decade.

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The non-oil sector in general

Construction

Over the recent decade, the entire GCC region, and particularly UAE, has been

featured by the unprecedented construction boom involving projects worth

hundreds of billions USD. UAE construction industry is approximately estimated at

$221 billion, which is the largest indicator compared to other Gulf countries.

The largest focus of the planned co